Court of Chancery Reaffirms Directors' Broad Books-and-Records Inspection Rights
Section 220(d) of the Delaware General Corporation Law permits a director to inspect a company's books and records for purposes reasonably related to the director's position as a director.
February 06, 2019 at 09:00 AM
6 minute read
Section 220(d) of the Delaware General Corporation Law permits a director to inspect a company's books and records for purposes reasonably related to the director's position as a director. It is well-settled under Section 220 jurisprudence that a director's right to access corporate books and records is broader than that of stockholders. A director who has a proper purpose for inspection (i.e., one that is reasonably related to his or her position as a director) has virtually unfettered access to the company's books and records. In a recent ruling, Schnatter v. Papa John's International, C.A. No. 2018-0542-AGB, Chancellor Andre G. Bouchard reaffirmed that longstanding rule and expounded on its application when the director may also have an additional, personal reason for seeking the books and records.
Background
John Schnatter, the founder of Papa John's and the company's longtime chairman and public spokesman, came under fire in 2017-2018 for his public criticism of the National Football League's handling of player protests and a report that he had used a racial slur during a company training call. Following widespread coverage of the slur incident, Schnatter resigned as the company's chairman and was not allowed to publicly appear on behalf of the company. The Papa John's board also formed a special committee to evaluate the company's relationships with Schnatter. After deliberating for approximately three hours, the special committee decided to terminate two agreements the company had with Schnatter.
Shortly after being informed of this decision, Schnatter submitted a demand to inspect 17 categories of the company's books and records, including communications between or among directors and the company's attorneys concerning Schnatter. The company largely rejected his demand, and Schnatter sued for access under Section 220(d). Schnatter subsequently filed a derivative complaint asserting fiduciary duty breaches by the company's CEO and the special committee members, unrelated to his Section 220 demand.
The company asserted that Schnatter's reason for making the demand was personal and improper, rather than his stated purpose—to investigate mismanagement of the company by the other members of the board. Following a one-day trial, the court asked the parties to meet and confer to explore a resolution of the books and records dispute, which resulted in a resolution concerning 13 of the 17 categories of documents sought in Schnatter's demand. The parties were unable to resolve the dispute over the remaining four categories.
The Court's Ruling
Bouchard largely granted Schnatter's request for the remaining four categories of documents, stating, “A director who has a proper purpose … has virtually unfettered rights to inspect books and records.” The court noted that this broad right of access is necessary for directors—who are charged with fiduciary obligations to a corporation—to be able to fulfill their obligations and perform their duties.
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